Resident Scholar Kenneth P. Green

It's been an interesting couple of years in the climate policy arena. Al Gore and the IPCC won the Nobel Prize; Cap-and-trade legislation was floated and quickly killed in Congress; Europe's carbon-trading system has melted down; Post-Kyoto negotiations are in a shambles; China became the world's largest greenhouse gas emitter; the climate stopped warming and started cooling; and now we have an economic crisis that will make expensive climate policy risky and unpopular. There are enough plot twists in the climate story to enrapture a Hollywood producer. There's even a comedic element: Milan's Opera House La Scala announced plans to stage an operatic version of Al Gore's Inconvenient Truth.

So instead of simply discussing cap-and-trade or carbon taxes, as we originally planned, I think we have to zoom out a bit and re-assess where we are with respect to climate policy.

First though, I like to let people know my background and biases. By training, I'm a biologist and environmental scientist. By vocation, I am a public policy analyst. My science is value-neutral--I just try to figure out what the science really says, and look past the hype. My policy-analysis is not value-neutral: I hold environmental protection in high regard, but it must complement rather then displace other values such as personal freedom and responsibility; economic prosperity; free enterprise; limited and non-confiscatory government; and so on. Politically I call myself a Solificon: I'm socially liberal, and fiscally conservative.

So let's start by reviewing the state of the science:

• Temperature records collected over the last 160 years do suggest a broad global warming from about 1850 to 1998 of about 0.76 ◦C (about 1.4 ◦F). That warming has been non-linear: about 0.4 ◦C happened from 1910-1940, and the balance from 1978 to about 1998. The two warming pulses were separated by a nearly 30-year downturn that did, in fact, have people worried about global cooling.
• For the last decade, warming peaked, and has recently declined: we're back to the average temperatures that prevailed in 1978. That doesn't mean global warming has stopped, it just means that some underlying cooling trend is dominating the climate, and humanity's greenhouse emissions are moderating the chill.
• Theory suggests that doubling the amount of CO₂ in the atmosphere, without feedbacks, would raise temperature by about 1 ◦C. Humanity has raised CO₂ levels thus far by about 35% percent from pre-industrial levels.
• So, putting that all together suggests that we likely caused most of the 0.4 ◦C increase of the last 50 years.
• Simple forward extrapolation suggests we'll cause an additional seven-tenths of a ◦C of heat retention if we reach twice the pre-industrial concentration of GHGs. That's expected to happen over the next 90 years, unless the economic crisis seriously retards growth, or China grows even faster than it we expect it to.
• Whether this heat retention will cause harm or not depends on changes in the strongest climate influences, like El Niņo, La Niņa, solar activity, and other current and wind patterns. If the fundamental climate influences are warming, greenhouse-gas (GHG) heat retention would add to the trend. If the underlying trends are cooling, GHG heat retention would only mitigate the cooling.
• If these numbers sound less alarming than Al Gore's, it's because they are. Al and the folks at the UN use assumptions to pump up the estimates of how much a given quantity of greenhouse gas will increase heat retention. Those assumptions have been shown to be spurious on both theoretical and empirical grounds. 

So, to wrap up the science: Theory and observation suggest humanity's greenhouse gas emissions have caused a bit of extra heat to be retained in the atmosphere, and will trap still more. Whether that will cause harm or not depends on both global and local factors that cause global and regional climate trends to fluctuate over time.

Now to the policy. If it were cheap or free to reduce greenhouse gas emissions as a way of hedging against the remote possibility that the positive-feedback crowd are right, and we might see major climate damage, I'd support it as cheap insurance. But hard experience in Europe, Asia, and North America shows that reducing greenhouse gas emissions is far from cheap. No matter what you've been told, the technology to significantly reduce emissions is decades away and extremely costly; and people do not like energy-impoverished living. And with China's growth in emissions, any benefit from lower GHG emissions in the developed world would be swamped by Chinese emissions in a matter of weeks to months.

This bears repeating: even if we fervently wanted to, nothing that the developed world could do would significantly reduce predictable global warming. That makes any expenditure to reduce greenhouse gases a waste of resources that will not yield any environmental or human risk-reduction benefits.

Our first-best policy option, therefore, is to increase the resilience of human structures and institutions through an aggressive program of fixing perverse incentives that increase climatic risk-taking. Policymakers who really want to implement rational climate policy should be focused, here and elsewhere, on building resilience to climate variability by removing the kind of risk subsidies that lead people to put themselves in climatically sensitive areas, to build on flood plains, in storm tracks and so on. They should be focused on ending the kind of subsidized infrastructure programs that lead people to build giant cities in deserts dependent on far-away sources of seasonal snow. And they should put economic repairs first: only the surplus wealth of productive economies allows us to protect our environment, set aside natural resources, and tread more lightly on the Earth.

Still, the general public has become convinced that we should invest in greenhouse gas controls, and as a consequence, we have, at present, two presidential candidates wedded to the idea of greenhouse gas controls using an instrument called "carbon emission trading," colloquially called "cap-and-trade." Others, notably environmental economists, have called instead for the use of a revenue-neutral carbon tax to control greenhouse gas emissions. The remainder of my talk will be devoted to comparing the two.

Cap-and-trade, the leading policy contender, is favored by environmental groups as well as both the McCain and Obama presidential campaigns. It is often claimed that carbon trading would work like sulfur trading, which controlled the SO₂ emissions that led to acid rain. However, the comparison is completely invalid.

When trading began, off-the-shelf technology to capture SO₂ was available at only a modest extra cost, and there was already a new source of low-sulfur fuel. There were a limited number of parties, emissions were directly measurable, there was a single political jurisdiction where permits could be validated, and emission-reduction activities were easily differentiated from activities that businesses would have to take for economic reasons, such as replacing or upgrading inefficient equipment. Unlike with SO₂, there is no off-the-shelf technology to bind CO₂ emissions after combustion, and there is no ready source of "low carbon fuel" to use as a fossil fuel replacement. Greenhouse gases must be estimated, rather than measured, and there would be thousands or tens of thousands of potential traders claiming benefits for activities that can not be easily validated, such as pledges to plant and maintain trees. Many actions that could receive valuable "carbon credits" given away in the initial permit allocation would simply benefit routine equipment upgrades companies would have to do in the normal course of operations. Since most cap-and-trade schemes allow the purchase of foreign "offset credits," jurisdiction issues would span not only the 50 states, but extend into other countries as well.

Consequently, rather than provide cost-effective reductions in greenhouse gases, the way that sulfur trading did for SO₂, carbon emission-trading would:

• Be ineffective at reducing GHG emissions, as governments will not be willing to watch the carbon-intensive sectors of their economy die, while the non-carbon-intensive sectors make huge profits off the snatched-up permits of dying entities; and
• Be highly prone to fraud--all parties have incentive to cheat and tolerate cheating

The European experience is highly illustrative of these problems!

To the extent that it actually does work, carbon cap and trade will

• Reduce economic growth
• Increase energy prices
• Increase prices of goods and services
• Increase food prices
• Turn virgin and recovering ecosystems into energy commodities
• Create massive new national (and international bureaucracies); and
• Create an entrenched system where rent-seekers and con-artists of all stripes soak the public and often do significant environmental and social harms (ethanol, anyone?)

A revenue-neutral carbon tax is slightly better, in that it would:

• Create a revenue stream to offset economic damage
• Create modest incentives for energy conservation throughout the economy
• Create modest incentives for entrepreneurialism
• Slightly stabilize prices
• Be less redistributionist (depending on how revenues are recycled)
• Be less prone to corruption (Government has incentive to enforce); and
• Use existing collection mechanisms.

We modeled that a tax of $15.00 per ton of CO₂ emitted would:

• Increase the cost of coal by 83%
• Increase the cost of oil by 11%
• Increase the cost of natural gas by 10%; and
• Add about $0.14 to a gallon of gasoline

Revenues (about $80 billion/yr) could be used to:

• Reduce income taxes by 6% or
• Reduce corporate taxes by 29%, or
• Reduce payroll taxes by 10%

We had estimated that a tax of this level would reduce greenhouse gas emissions by about 11%.

I previously felt that a revenue-neutral carbon tax was a good idea, because it would be both effective and could even be economically beneficial. But three developments have caused me to retract my support. First, rising energy costs have already imposed a huge carbon tax with little GHG reduction. This suggests that the elasticity of energy use could be lower than prior estimates, meaning it would be a useless gesture. Second, as implementations of carbon taxes in Europe and Canada have demonstrated, governments simply cannot implement such tax systems without sucking up some of the revenue, and using the rest to benefit crony-capitalists and steer money to favored constituencies. And finally, because using biofuels such as ethanol would let people save on carbon taxes, demand for such fuels will grow, only compounding the environmental and nutritional mischief they cause.

Kenneth P. Green is a resident scholar at AEI.